Various houses have reported Absolute Return fund launches, with Polar Capital’s UK Absolute Return fund being the most recent, due to launch on 3 June. The surge of funds has been driven by UCITS III regulations enabling managers increased powers to employ as part of their fund strategy. One notable feature, granted by these regulations, is the ability to short stocks and therefore take directional bets on stock prices falling, allowing such funds to prosper in times when market returns are diminishing.
The popularity of these funds has prompted the IMA to launch an Absolute Return Sector, in which the sector is defined to include those “Funds managed with the aim of delivering absolute (i.e. more than zero) returns in any market conditions.” The 17 funds included, (see table below) must be available to both UK and overseas domiciled funds which are UK registered and have distributor status.
The IMA has stated that there is no asset based monitoring for this sector, meaning a broad variety of funds could be eligible for inclusion. A cynic might argue that the sector could in consequence be something of a hotchpotch, but an annual review by the IMA's Performance Category Review Committee promises to ensure at least a modicum of sense prevails.
Financial Express created an Absolute Return sector last year, working along similar lines to that recently launched by the IMA with an open remit for inclusion of funds which state their absolute return intentions, but going further to include any funds which are actually branded as absolute return or feature absolute return in their objective, something the IMA sector has fought shy of, for reasons they are best placed to explain.
According to Financial Express’ Absolute Return sector, it can be seen that the constituent funds have held up relatively well over the last year, with 23 of the 32 funds producing better returns than the FTSE All Share’s loss of 3.08% over the last year.
However, as these funds are designed to produce absolute returns given all market conditions, they should not be assessed against any relative benchmark. Based on this, only 19 of these funds have succeeded in producing a positive return over this period. Therefore one must still remain selective of which absolute return fund to invest in, with the major factor to consider being the fund manager’s ability to produce alpha in all market conditions.
The key concern is the ability of these funds to keep up with long only funds during a market upturn. This highlights the importance of market direction for these funds, with a view that these funds may not be ideal when the market inevitably recuperates. The belief here is that these funds may lag behind and suffer mass sell-offs in favourable conditions, leading these funds to be branded as just the recent ‘fad’.
The relatively youthful nature of this sector presently stipulates that it cannot be scrutinised in great depth as many funds are yet to experience a full economic cycle, in order to assess the true merits of such a vehicle, with only 6 funds displaying 5 year histories.
The fund manager’s ability to take the right directional bets on stocks in differing market conditions plays the pivotal role in generating returns for these funds, and is essentially what investors should base their investment decisions upon. ;
| IMA Absolute Return Sector Constituencies | |
| UK (5) | Overseas (12) |
| Absolute Insight Morley Diversified Strategy Blackrock UK Absolute Alpha Henderson Credit Alpha Henderson Emerging Market Debt Absolute Return | Absolute Insight Currency Absolute Insight Emerging Market Debt Absolute Insight Europe Equity Market Neutral Absolute Insight UK Equity Market Neutral Absolute Insight International Equity Market Neutral SISF Absolute Return Bond SISF Emerging Market Debt SISF Asian Bond Mellon Evolution Global Alpha Newton Offshore Strategy Alternative Assets Mellon Evolution Core Alpha Mellon Evolution Currency Alpha Option |